Can Personal Loans Be Discharged in Bankruptcy? A Detailed Guide

Filing for bankruptcy is a significant decision that affects many areas of a person’s life, including their debts. Personal loans are often a source of financial strain, and many wonder whether these loans can be discharged through bankruptcy. The short answer is yes, in many cases, personal loans can be discharged, but there are important considerations to keep in mind.

Bankruptcy comes in two primary types: Chapter 7 and Chapter 13. Each type has different implications for how personal loans are handled. Understanding which debts can be relieved in bankruptcy and the requirements for each type is essential to determine whether personal loans are eligible for discharge.

Key Points:

• Personal loans can be discharged in Chapter 7 bankruptcy, but it depends on the loan’s nature.
• Chapter 13 bankruptcy offers a repayment plan, which may not discharge the loan.
• Fraudulent loans and secured loans may not be discharged in bankruptcy.

How Does Bankruptcy Impact Personal Loans?

When a person files for bankruptcy, their outstanding debts may be discharged or reorganized depending on the type of bankruptcy they choose. Bankruptcy helps individuals get relief from overwhelming debt, offering them a fresh financial start. Personal loans, like most other types of unsecured debt, are generally eligible for discharge, but several factors can influence this.

Chapter 7 Bankruptcy: Discharge of Personal Loans

Chapter 7 bankruptcy is known as “liquidation” bankruptcy. In this process, the individual’s non-exempt assets are sold to pay off as much of their debt as possible. Most unsecured debts, including personal loans, are usually discharged, meaning the individual is no longer legally required to repay them.

Examples of Dischargeable Personal Loans in Chapter 7:

• Unsecured loans from a bank or credit union.
• Personal loans from friends or family members.
• Payday loans or credit card debt.

However, if the loan is secured by collateral—such as a car, house, or other valuable asset—the lender has the right to repossess the collateral if the loan is not repaid. In such cases, the personal loan may not be fully discharged if the creditor takes the asset. For example, if you use your car as collateral for a personal loan, the lender could take the car as part of the bankruptcy process.

Chapter 13 Bankruptcy: Personal Loan Repayment Plan

Unlike Chapter 7, Chapter 13 bankruptcy allows individuals to keep their assets while creating a repayment plan to pay back their debts over 3 to 5 years. Personal loans are not usually discharged in Chapter 13, but the amount you must repay may be reduced based on your income and the loan type.

In Chapter 13, the court will determine how much of your unsecured debt (including personal loans) you can afford to repay after reviewing your income and expenses. For example, if you have a personal loan of $10,000, the court might reduce the repayment amount to $6,000, depending on your financial situation.

Exceptions to Personal Loan Discharge

Though most personal loans can be discharged, there are notable exceptions. Personal loans obtained through fraudulent means or under false pretenses will likely not be discharged. If you took out a loan with the intent to never repay it, the court may deem it fraudulent and will not relieve you from the responsibility of paying it.

For example, if you took out a personal loan just before filing for bankruptcy with the intention of never paying it back, the bankruptcy court may investigate and find that the loan was fraudulent, disqualifying it from being discharged.

Note: Personal loans used for fraudulent purposes will not be discharged in bankruptcy.

What Happens If You Don’t Qualify for Discharge?

If a personal loan is not dischargeable in bankruptcy, the borrower is still responsible for repaying it. However, filing for bankruptcy may still reduce the overall financial burden. In Chapter 7, unsecured debts such as credit card bills and medical debts can be wiped away, allowing more resources to go toward paying off any remaining personal loans.

In Chapter 13, the borrower’s income and debt repayment plan are reviewed, and this might allow them to pay a lower amount on their personal loan, but they will still need to repay some or all of it.

How to Ensure Your Personal Loan Can Be Discharged

To increase the chances that your personal loan will be discharged in bankruptcy, it’s important to avoid any fraudulent behavior during the application process. The bankruptcy court will carefully scrutinize your financial history, so it’s essential to be honest and transparent about your debts.

Here are some tips:

• Avoid taking out loans right before filing for bankruptcy.
• Do not hide any debts or assets from the court.
• Work with a bankruptcy lawyer who can help guide you through the process.

Note: It’s essential to disclose all personal loans and financial transactions when filing for bankruptcy.

Conclusion

In summary, personal loans can be discharged in bankruptcy, but whether they will be depends on the type of bankruptcy filed and the nature of the loan. Chapter 7 bankruptcy offers the potential for discharge, while Chapter 13 allows for restructuring and repayment. However, loans obtained through fraudulent means or secured loans may not be discharged.

If you are considering bankruptcy to relieve yourself of personal loans, consult with a bankruptcy attorney to understand the best course of action for your financial situation. Bankruptcy can provide a fresh start, but it’s essential to understand its implications before proceeding.

FAQ’s

1. Can personal loans be discharged in Chapter 7 bankruptcy?
   Yes, most unsecured personal loans can be discharged in Chapter 7 bankruptcy, except for secured loans or loans obtained fraudulently.
2. Can I keep my car or house if I file for Chapter 7 bankruptcy?
   If the loan is secured by collateral like a car or house, the creditor may repossess it. However, if the loan is unsecured, you can discharge the debt and keep your assets.
3. Are personal loans from friends or family dischargeable in bankruptcy?
   Yes, personal loans from friends or family are typically dischargeable in bankruptcy, as long as they are unsecured.
4. Can bankruptcy help reduce the amount I owe on personal loans?
   In Chapter 13 bankruptcy, the amount you owe on personal loans can be reduced based on your income and ability to repay.
5. What happens to personal loans in Chapter 13 bankruptcy?
   In Chapter 13 bankruptcy, personal loans are typically repaid over a 3 to 5-year period. Some debts may be reduced depending on your financial situation.